Capacity to Contract

According to Business law, an individual must be competent to enter into a contract.

As per Section 11 of the Contract Act, the following individual is competent to enter into a contract:-

The individual must be a major not minor.

The individual should be of sound mind.

The individual should not be disqualified by the law.

Let us understand each in detail:-

1. Contract with Minor

The law protects the minors against their own inexperience and the possible improper designs of those who are experienced. The Contract Act states that, only a person who is major can enter into contract. As per Section 3 of the Indian Majority act, 1875, a minor is a person who is under 18 years of age. An agreement with minor is void and cannot be ratified by him/her until he/she attains majority. However, a minor can be promise or beneficiary under a contract and can enter into special types of contracts for necessaries of life.

Example

The case of Mohiri Bibi vs. Dharmdas Ghose

A minor mortgaged his house in favour of moneylender to secure a loan of Rs 20,000 of which the minor was paid Rs 8000.later; the minor sued the moneylender for setting aside the mortgage on the pretext that he was under age. The mortgage was deemed void and cancelled. The moneylender’s contention that the minor should repay the amount was not accepted

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2. Soundness of Mind

As per section12 of the Contract Act, An individual is of sound mind to make a contract if the individual is capable of understanding the terms of the contract at the time of its creation and is capable of making rational judgements in his/her interests. As per the Act, Lunatics i.e. person deranged because of the personal trauma, individuals who have completely lost their mental capacity and drunken/intoxicated persons who comes under influence of any such substances are of unsound mind and do not have capacity to enter into any contract. While a Lunatic and drunken individual may have lucid intervals but an idiot is such an individual who does not possess any soundness of mind and all contracts with such persons are void. Lunatics and Drunker individuals can enter into contract only at the period of their lucidity but not otherwise.

Example

Williams is drunk and he visits a broker for having a house on rent. They fixed the price at Rs 15,000 to be payable each month and one month deposit. He contract will be void because he is in drunken state and not in any capacity to enter into a valid contract. After he comes in lucid state the following day, then he can enter into the same contract.

3. Individuals disqualified by law

As per the contract Act, the following are said to disqualify from entering into any contract:-

(a). Alien Enemy- Any Individual is not a citizen of India is termed to be Alien and cannot enter into any contract.

(b). Foreign Sovereign

(c). Corporations- Any company is a different entity (artificial person) created by law. To enter into any contract it can enter via its board of directors.

(d). Convicts-Individual are sentence by the law for imprisonment cannot enter into any contract as per the Act during the imprisonment period. He can enter into contract once his punishment completes with the sentence expiration.

(e). Insolvents- Insolvents cannot enter into contract until the court passes an order for Discharge.